prudent investor newsletters

Video: Peter Schiff: This time it is different, it will be a lot worse

noreply@blogger.com (benson_te) — Mon, 20 May 2013 06:04:00 +0000

This time is different, it will be a lot worse, says Peter Schiff speaking at the 2013 Las Vegas MoneyShow.

Mr Schiff's talk covers a wide range of interrelated topics from today's deja vu of 2006 in terms of steroid induced market euphoria, the bond market ponzi scheme, the Fed exit's bluff, manipulation of price inflation and growth statistics, runaway inflation and hyperinflation and the gold bubble (a bubble which ironically hardly anybody from Wall Street owns). (hat tip Lewrockwell.com)

Graphics: Here Comes Super-Abenomics!

noreply@blogger.com (benson_te) — Mon, 20 May 2013 04:11:00 +0000

From this week’s cover of the Economist magazine.

The worship of inflationists and the religion of inflationism has reached new heights. Yes we are at the pinnacle of the central banking-inflationism bubble.

As the great Ludwig von Mises once wrote, “The favor of the masses and of the writers and politicians eager for applause goes to inflation.”

Yet all such optimism looks nothing new. The following article from the New York Times in March 1999 showcases an almost similar level of optimism where interventionism has been seen as an elixir to Japan’s economy.

Fourteen years after, yet still the hope for political magic to work.

The Flaws of BSP’s Real Estate Monitoring and Banking Stress Tests

noreply@blogger.com (benson_te) — Sun, 19 May 2013 17:44:00 +0000

Rushing in defence over growing concerns of the risks of asset bubbles, the Philippine central bank, the Bangko Sentral ng Pilipinas conducted a real estate exposure test monitoring which included a partial banking stress test[1].

In the report the BSP has not explicitly issued a confirmation or a denial of the risks of a domestic bubble. But they placed into the context the following

-The Philippines’s total banking exposure on real estate was at Php 821.7 billion as of December 2012.

-The BSP continues to monitor the 20 percent cap on RELs since 1997 where current report includes “loans by developers of socialized and low-cost housing, loans to individuals, loans supported by non-risk collaterals or Home Guarantee Corporation guarantee as well as exposures by bank trust departments and thrift banks.”

-The thrust to examine the banking sector’s exposure in real estate “is in line with the BSP’s pursuit of financial stability”

-The BSP hasn’t shown any signs of worries, due to stable non-performing RELs ratio which was “reported at 3.7 percent as of end-December 2012”

-And the BSP seems confident there is enough capital to withstand any potential shocks “with capital adequacy ratio of tested U/KBs and TBs will stand at 15.77 percent despite a 50 percent simulated default on residential real estate loans.”

First of all, the BSP does not mention that Real Estate Loans (REL) at 821.7 billion pesos and with a total loan portfolio TLP (net of interbank lending) of 3,938.9 billion pesos, real estate loans as a share of TLP would now account for 20.86%.

And so if my interpretation of their data is accurate then the banking sector has essentially hit its speed limits on issuing loans to the property sector. Will the BSP put on the brake and reverse the boom? How?

Next, it isn’t clear what the BSP means by “financial stability”? If they are referring to controlling price inflation my question is—are there no opportunity costs in in implementing “financial stability” measures? Or why should moderating price inflation come at the costs of blowing asset bubbles?

Let me cite the former chief of Monetary and Economic Department at the Bank of International Settlement’s William R. White in his 2006 paper who argued against price stability policies (bold mine)[2]

…price stability is indeed desirable for a whole host of reasons. At the same time, it will also be contended that achieving near-term price stability might sometimes not be sufficient to avoid serious macroeconomic downturns in the medium term. Moreover, recognising that all deflations are not alike, the active use of monetary policy to avoid the threat of deflation could even have longer term costs that might be higher than the presumed benefits. The core of the problem is that persistently easy monetary conditions can lead to the cumulative build-up over time of significant deviations from historical norms – whether in terms of debt levels, saving ratios, asset prices or other indicators of “imbalances”.

Also Non Performing Loans (NPLs) are coincident if not lagging indicators. NPLs are low because the current boom continues. NPLs become reliable indicators, when asset quality deteriorates or when the credit boom is in the process of reversing itself into a bust. Again they are coincident if not lagging indicators.

In addition, the BSP appears to have isolated its bank stress test by limiting “simulated default on residential real estate loans”. Why? Doesn’t the BSP know that economies are complex and vastly interdependent such that economies do not operate on isolation as the BSP model presumes?

A bursting bubble will ripple through not only through the residential real estate segment but would also impact commercial property sectors (office, shopping malls, casinos etc...) or firms that are highly leveraged.

More importantly, once the real estate sector gets slammed by the entwined factors of financial losses and deleveraging, such will likewise impact all sectors that have exposure on them, and so with the banks.

And affected secondary sectors will also hit firms from different industries connected to them, and so forth.

Thus the complex latticework of commercial networks means that the feedback mechanisms from the bubble busts will have a domino effect and thus spawn a crisis.

So models will not be able to capture the contagion effects from a real-estate-stock market bust for the simple reason that models tend to mathematically oversimplify what truly is a complex reality.

The fundamental flaw with BSP’s implied defence of the risks of asset bubbles has been to interpret statistics as economics.

The above diagram represents the compounded average of 15%. A compounded average of 15% means a doubling of anything in 5 years. This applies to leveraging or economic imbalances.

Let us assume that a doubling of leveraging or imbalances will put an economy to a state of vulnerability to financial risks. It would not be helpful to say that, if we are at the T-3 stage, where statistics show only 152.09, to claim that there is no risk because of the current state. While such statement may be true, it essentially denies the imminence based on the trajectory.

In other words, the shifting of the burden of risk analysis from the rate of growth to reading today’s numbers would represent as misleading analysis and a denial.

The same logic applies to a pre-debt crisis build up as shown by history.

In the chronicle of about 250 crisis in 8 centuries, Harvard’s Carmen Reinhart and Kenneth Rogoff notes of the same pattern[3] (bold mine)

domestic debt is not static around default episodes. In fact, domestic debt often shows the same frenzied increases in the run-up to external default as foreign borrowing does. The pattern is illustrated in Figure 5, which depicts debt accumulation during the five years up to and including external default across all the episodes in our sample. Presumably, the comovement of domestic and foreign debt is produced by the same procyclical behavior of fiscal policy documented by previous researchers. As shown repeatedly over time, emerging market governments are prone to treating favorable shocks as permanent, fueling a spree in government spending and borrowing that ends in tears.

Again it is the trajectory that matters.

In short, it is the presence or absence of the factors that drives the incentives for these frenzied desire to accumulate debt that needs to be identified and curtailed.

Unfortunately since the genesis of such incentives have been political which have been effected through social policies, and from which the untoward impact from such polices are invisible and incomprehensible to the public, such policies will hardly be stopped until a blowback from the marketplace occurs.

And as for the state of euphoria, where governments think that they have reached a state of presumed perfection, the passing of the bank stress test in Cyprus in 2011 should serve as a fantastic example:

From the Cyprus Mail[4],

In Nicosia the Finance Ministry issued a statement saying: “The measures which the banks are taking or planning to take will further increase solvency.”

The statement also referred to a “removed possibility” of having to support the banks, stating the government was ready to “immediately take any necessary measures to maintain financial stability.”

BoC “successfully passed the test” because of its strong capital base, fluidity and satisfactory profitability, Bank of Cyprus’ Chief Executive Officer, Andreas Eliades.

Strong capital base, fluidity, increase solvency and satisfactory profitability, all turned on its head, March this year. The rest is history.

I know, the Philippines is not Cyprus. But the important lesson from the Cyprus episode is one of overconfidence that leads to complacency that further enhances systemic buildup of risks.

Remember bubbles are manifestations of the reflexive feedback loop between expectations as influenced by prices, and actions as influenced by expectations, which are enabled and facilitated by debt and incentivized by policies.

Overconfidence and complacency fosters systemic instability which is hardly “the pursuit of financial stability”

The BSP’s Wealth Transfer

These two charts embody the structural deficiencies of the Philippine political economy.

The BSP estimates that only 21.5% of households have access to the formal banking sector[5].

Yet domestic credit provided by the banking sector accounts for 51.54% of the GDP in 2011[6]. I would guess that the latter figure would be substantially higher today, given the credit boom mostly channelled through the banking sector.

Yet what these two diagrams say is that statistical economic growth has been immensely tilted towards those less than 21.5 households who have access and or have used credit from the banking system.

Not all depositors like me have used credit from the banking sector for whatever purpose. Yes I have credit cards but I which I use infrequently.

The BSP confirms this; they estimate that only 4% households have credit cards.

The lopsided exposure to the banking industry has been likewise reflected on the stock market.

As of 2011, according to Bloomberg/Matthews Asia[7] the wealthy elites control 83% of the market capitalization of the Philippine Stock Exchange

And considering the low penetration levels to the banking system and to the stock market, it would be even more conceivable that the general public hardly has any access to the more complex bond markets.

Again capital markets and the banking system have been greatly biased to the formal economy and to the oligarchs and plutocrats who control them.

Though we know that this has been an inherited problem, there has been little attempt by the powers-that-be to distribute them through liberalization ever since.

The procrastination by the PSE to hook up with the ASEAN trading link or the integration of ASEAN bourses[8] is an example. Philippine political and economic elites seem apprehensive over the prospects of losing their privileges with an ASEAN interconnection. The same applies with the lack of commodity markets where such markets would undermine the privileges of these plutocrats.

The much ballyhooed policy reforms has been more of the same. For example, government spending based on public-private partnerships, would only mean that the politically connected will be rewarded with such economic opportunities or concessions.

Yet foisting a zero bound rates in order to supposedly boost domestic demand doesn’t really help the real economy, for the simple reason that the informal economy has little direct access to the formal sector. And this will not change unless the government deregulates or liberalizes.

On the contrary credit easing policies has only boosted the wealth of the politically privileged elite.

As to quote anew the Atlantic[9]:

In 2012, Forbes Asia announced that the collective wealth of the 40 richest Filipino families grew $13 billion during the 2010-2011 year, to $47.4 billion--an increase of 37.9 percent. Filipino economist Cielito Habito calculated that the increased wealth of those families was equivalent in value to a staggering 76.5 percent of the country's overall increase in GDP at the time.

In short, BSP policies represent transfers of resources from the real economy to the political class (via bigger government spending and bigger bureaucracy) and politically connected economic elites.

Thus the manipulated boom, which has been peddled by media and bought for by the gullible public, has been used as license via populist mandate to extend on such privileges.

BSP’s Underbelly: The Philippines’ Shadow Banks

Now going back to the direction of BSP policies.

Promoting “domestic demand” through expanded access of credit has been the purported reason for zero bound rates and the lowering of interest rates of the SDAs[10].

Combine these with the recent credit rating upgrades from major international credit agencies, all these means subsidizing or rewarding debt. Thus the natural outgrowth of accelerating debt.

So the BSP’s direction has been to promote debt. But on the other hand they claim that they would regulate or control it. So the BSP essentially operates in a cognitive dissonance, holding two conflicting ideas as policies. This is a wonderful example of the idiom “the left hand doesn’t know what the right hand is doing”: a self-contradiction

Now that the real estate sector has reached its limits as noted above, the question is will the BSP act?

Even if the BSP does, I am quite sure that many market participants would resort to regulatory arbitrage to circumvent them.

They may shift the use of loans even if they are classified as non-real estate into real estate or into the stock market, such as the fateful Bangladesh stock market crash in 2011[11]. Banks may use off balance sheets. Others may resort to bribery.

Of course, given the huge domestic informal economy, the most likely avenue for regulatory arbitrage is to use the nexus between the formal and the informal economy: the shadow banking system.

The BSP believes that they have the banking sector within their palms, but the World Bank says otherwise

Shadow banking system in Philippines and Thailand accounts for more than one-third of total financial system assets[12]. One would note in the right chart that the Philippine shadow banking system has seen an intensifying rate of growth which has polevaulted since 2009 and has nearly surpassed Thailand’s level.

Aside from common informal microfinancing[13] as 5-6 lending, “paluwagan” or pooled money, “hulugan” instalment credit, much of the growth in the shadow banking system has reportedly been in the real estate sector, particularly the in-house financing from developers[14].

The BSP claims that it would investigate[15] these even if they hardly control the formal system.

The shadow banking system has become a worldwide phenomenon and has grown to as high as $67 trillion in 2011 according to the CNBC[16] or nearly 83% of the $80 trillion world economy. The risks of the shadow banking sector doesn’t intuitively or automatically emerge out of “lack of regulation”, rather, the shadow banking industry has been largely a product of overregulation via regulatory arbitrage. Where an economic or financial system has been hobbled by politics, risks becomes centralized and thus systemic.

Bottom line: Loans to the real estate sector have significantly been more than the caps set by the BSP. Easy money policies have apparently filtered into the informal sector. This means systemic leverage has been far more than what the BSP oversees and supervises. Lastly the BSP hardly has solid control over the formal sector. The same is amplified with the informal or shadow banking system.

Like almost every central bankers today, BSP policies supposedly meant to promote “domestic demand” will be pushed to the limits, despite the rhetoric. And this will further fuel the mania phase in both the stock market and the property sector.

[1] Bangko Sentral ng Pilipinas BSP Releases Results of Expanded Real Estate Exposure Monitoring, May 10, 2013

[2] William R. White Is price stability enough? Bank of International Settlement April 2006

[3] Carmen M. Reinhart and Kenneth S. Rogoff The Forgotten History of Domestic Debt September 21, 2010 Harvard University

[4] Cyprus Mail Cyprus banks pass EU stress test, July 16, 2011

[5] Bangko Sentral ng Pilipinas 2012 Annual Report Volume 1

[6] Tradingeconomics.com DOMESTIC CREDIT PROVIDED BY BANKING SECTOR (% OF GDP) IN PHILIPPINES

[7] Kenneth Lowe Kicking the Tires Asian Insight Matthews Asia 2013

[8] See Phisix 7,200: Up, up and away! The Illusions of Comfort May 6, 2013

[9] See The Atlantic on Philippine Economic Boom: Looks Great on Paper May 8, 2013

[10] See Phisix and the BSP: This Time is Different? March 17, 2013

[11] See Bangladesh Stock Market Crash: Evidence of Inflation Driven Markets January 11, 2011

[12] Swati Ghosh, Ines Gonzalez del Mazo, and İnci Ötker-Robe Chasing the Shadows: How Significant Is Shadow Banking in Emerging Markets? World Bank September 2012

[13] See Phisix: In The Eyes of Asia’s Bond Market, Deflation Phantom, Hedge Against Inflation June 29, 2008

[14] Businessworld Research The pros and cons of shadow banking February 8, 2013

[15] Inquirer.net BSP to probe ‘shadow banking’ allegations October 1, 2012

[16] CNBC.com 'Shadow Banking' Still Thrives, System Hits $67 Trillion November 18, 2012

Phisix in the Shadow of Greed and Fear

noreply@blogger.com (benson_te) — Sun, 19 May 2013 17:37:00 +0000

Strange times are these in which we live when old and young are taught in falsehood's school. And the one man who dares to tell the truth is called at once a lunatic and fool. -- Plato

Up, up and away!

The Philippine Phisix only posted a marginal .24% gain this week. But on a weekly basis the local benchmark soared to an all-time high.

Such marginal gain reflects on this week’s sharp volatility, specifically the difference between the spike during the two post-election trading sessions and the subsequent profit taking at the close of the week which ended up with a residual net gain.

Year-to-date the Phisix has returned a fantastic 25.24% as of Friday’s close. We are fast closing in on the 32.95% annual return of 2012. Yet there are 7 months until the end of the year.

At the current rate of return of about 5% gain per month, if sustained, would translate to a 10,000 Phisix by the end of the year or at the first quarter of 2014.

The steepening of the ascending slope suggests of the deepening convictions of the bulls of the trend’s sustainability. Such convictions have now been strengthened by even more price increases.

But this seems to have morphed into more than just a reflexive feedback loop between expectations (shaped by prices) and outcomes (influenced by expectations); some people in social media have already been exuding an aura of invincibility by hectoring on very rare bearish international reports.

As I have said before[1], markets have hardly been pricing about “cheap” or “expensive” but about electrically charged emotions: Greed and Fear.

Sectoral returns have been demonstrating such dynamic.

Bulls have been swamping into popular investment themes, while the bears have frantically been smashing down what seems as ‘politically incorrect’ issues.

Bull markets tend to lift all, if not most issues, but apparently not this time.

Also, the annual rotational pattern has been broken. Instead of an alternating leadership as during the past 6-7 years, the mining sector has gone completely in the opposite direction of the general markets.

The decline in the mining issues has not been proportional. Some issues fell of the cliff where losses account for an astounding 50-70% from their recent zenith.

Such dramatic selloffs and declines already exhibit a state of depression with hardly any “corporate fundamentals” to account for. Others have been down by 20-30%. I may add that the biggest losers have been those with operations within the Benguet area, so I am wondering whether domestic politics may have been aggravated the dour sentiment which has been partly imported.

So, on the one hand we see intensive yield chasing phenomenon. On the other, we see panic. Greed and Fear.

But what should concern serious participants is not the “fear”, but the dominant “greed” as manifested by a ballooning mania.

And I wouldn’t exactly characterize “greed” in the conventional sense, but rather greed in the context of expansive risk appetite as consequences from various social policies.

The public has been motivated to speculate from easy money policies and from implied guarantees on the financial market, thus the market has responded in such rampant and destabilizing manner.

When we tax something we get less of it, but when we subsidies something we get more of it. So this applies to stock markets too: Current policies subsidize or reward “greed”, and at the same time, punish “prudence”.

Even the Jaime Caruana, the chief of the Bank of International Settlements, or the central bank of all central banks, have come to recognize and warn about this[2].

Global Equity Markets Melt-UP

Year-to-date, major global benchmarks have seen a return of a RISK ON environment as the levitation of equity markets has been accelerating.

The above table doesn’t give justice to the overall representation of the other bourses. This is due to the distortions from the magnified gains by Japan’s Nikkei which diminishes what should have revealed as outsized gains for developed economies and ASEAN equities

In the behavioral science field, this is called the perceptual contrast effect[3], where people’s judgement are shaped by perceptions framed from relative immediate or visible comparisons

Nonetheless, gains of major developed economies and ASEAN nations have been mounting while the BRICs seem to be recovering except for Brazil.

In observing price trends, the melt up in equity markets have become global.

The US major benchmark, the Dow Jones Industrials, as well as, Germany’s DAX index has shown upside acceleration.

As of Friday’s close, the Dow Industrials has been up 17.2% year-to-date while the German DAX has been up 10.32%. In 2012, the Dow yielded gains of 6% while the DAX 29%.

As I have recently pointed out[4], the surge in the DAX comes in contrast with Germany’s struggling economy. Germany managed to eke out a .1% growth during the first quarter of the year. Whereas the overall direction of growth since 2011 has been on a downtrend, yet the German DAX seems on a melt up mode.

This Isn’t Your Daddy and Grand Daddy’s Market

The most striking parallel universe phenomenon would be in France.

French financial markets will tell you of a booming economy:

The equity bellwether the CAC 40 has racked up gains of 9.89% year-to-date and was up 15.23% in 2012. Interest rates as measured by the French government 10 year yields[5] have been drifting at multi-year lows (see lower window).

So OECD France has a booming bond and the stock markets almost similar to the emerging market Philippines.

Ah, but France is not the Philippines. Ironically the French economy slipped into a recession in the first quarter of this year. For most of 2012, France has also been in periodical recessions. Yet the market booms. France was even downgraded by Moody’s last November[6]. But the stock and bond markets have ignored them. And this is why the French equity market seems in melt up mode even as the stagnating economy seems to intensify.

And given that the French economy has been hocked to the eyeballs with debt, as debt-to-gdp has been ballooning[7] since 2009, one would expect that the extended recessions would have amplified credit and market risks that should have roiled the financial markets.

But no, this time is different.

Bad news is good news. More signs of economic troubles translate to more prospects of accommodation from central banks. The more the bad news, the better for the financial markets.

In addition, central banks policies appear to have jaded the market’s perception of risks. French interest rates have gone down partly because of Japan government’s aggressive pursuit[8] of doubling her monetary base via “Abenomics”, where Japanese insurance and banking firms sought higher yields[9] (if not safehaven) from French bonds as shown above.

The Swiss National Bank (SNB) may have also been a party[10] to subsidizing the French government through accumulation of French bonds.

Or it could be that French institutions with international exposure could have been downsizing partly by selling their holdings abroad from which they repatriate to buy French bonds for reserve requirements purposes.

Charles Gave of the Gavekal Research opines[11]

France has a large financial sector, with huge international positions. Some entities may be selling international holdings which demand large reserve requirements. The proceeds are then brought back in France to buy French government bonds—against which there are no reserve requirements.

As I earlier said, current developments reveal that there hardly has been anything fundamental in the traditional or conventional understanding from which current markets operate on.

This isn’t your granddaddy or your daddy’s financial markets.

Or take a look at three national benchmarks above.

All of them are apparently in a melt-up mode. Year-to-date the chart at the left has yielded 45.63%, the center 29.45% and the right 61.92% as of Friday’s close.

The melt-up for these three bellwethers has a common denominator: they have been spiked by strong monetary forces.

Argentina’s Merval[12] (center) and Venezuela’s Caracas[13] (right) have both been enduring hyperinflation but in different phases[14], their stock markets are proving to be partial safehavens. On the left is Japan’s Nikkei[15]. Japan’s Nikkei 225 has skyrocketed from the government’s plan to double her monetary base which is really is in the direction of Argentina and Venezuela except that Japan policies are in an embryonic phase.

Thus the conventional and popular wisdom where today’s market has been one about growth, or fundamentals or political salvation will be proven wrong in the fullness of time.

Again this isn’t your granddaddy or your daddy’s financial markets.

[1] See Phisix 7,000: Why Asia’s Rising Star is a Symptom of Mania April 29, 2013

[2] See BIS Official: Loose Central Bank Policies Looking Increasingly Dangerous May 17, 2013

[3] ChangingMinds.org Perceptual Contrast Effect

[4] See Parallel Universe: Booming German and French Stocks as Economies Stagnate May 15, 2013

[5] Bloomberg.com France Govt Oats Btan 10 Yr Oat

[6] Guardian.co.uk Moody's downgrades France's credit rating to AA1 November 20, 2012

[7] Tradingeconomics.com FRANCE GOVERNMENT DEBT TO GDP

[8] Zero Hedge We Found The 'Other' Greater Fool May 13, 2013

[9] Businessinsider.com European Government Borrowing Costs Are Plunging — And It's All Thanks To Japan April 8, 2013

[10] Wall Street Journal Button-Down Central Bank Bets It All January 8, 2013

[11] Zero Hedge Charles Gave: "Get Out Of Banks, Get Out Of France - Get Out Of The Euro" May 16, 2013

[12] Bloomberg.com Buenos Aires Stock Exchange Merval Index

[13] Bloomberg.com Caracas Stock Exchange Stock Market Index

[14] See Inflation and Price Controls: Latin America Edition April 19, 2013

[15] Bloomberg.com Nikkei 225

Infographic: The Silver Squeeze

noreply@blogger.com (benson_te) — Sun, 19 May 2013 01:49:00 +0000

The following infographic courtesy of the Austrian Insider (hat tip Zero Hedge)

The Silver Squeeze – An infographic by the team at The Silver Squeeze Free Infographic

Quote of the Day: The Intelligencia pay no price for being wrong

noreply@blogger.com (benson_te) — Sun, 19 May 2013 01:37:00 +0000

Well, if you come up with a lot of wrong ideas and pay a price for it, you’re forced to think about it and to change your ways or else get eliminated. But there is no such test. The only test for most intellectuals is whether other intellectuals go along with them. And if they all have a wrong idea, then it becomes invincible.

This is from economic professor, author and political philosopher Thomas Sowell expounding a passage “The Intelligencia pay no price for being wrong” from his latest book Intellectuals and Race in a video interview with Wall Street Journal’s Peter Robinson. (hat tip Mises Blog)

Paying no price for being wrong can be seen in the same light as Nassim Taleb's “skin in the game”, the stakeholder’s dilemma or the principal agent problem—conflict of interests shaped by diverse incentives

This is very relevant not only to the participants of the financial markets but especially pronounced in public opinion arena where social policies are shaped. The crux: Bad ideas have consequences. And people with little “skin in the game” or “pay no price for being wrong” are the most notorious promoters of ‘noble sounding’ deceptive ideas.

War on Cash: Nigeria and Ghana Experiment with Cashless System

noreply@blogger.com (benson_te) — Sat, 18 May 2013 08:30:00 +0000

Governments and banksters have been trying their darn best to put the savings of their constituencies on their palms.

African nations of Nigeria and Ghana will be experimenting with cashless transactions.

The Nigerian program from theNextweb.com

Last week at the World Economic Forum on Africa held in Cape Town, South Africa the Nigerian National Identity Management Commission (NIMC) and MasterCard announced their collaboration with plans to roll-out an initial 13 million MasterCard-branded National Identity Smart Cards with electronic payment capability.

The 13 million cards will form part of a pilot program which will see the West African country’s citizens who are 16 years and older and those who have been residents in Nigeria for more than two years being issued with the new National Identity Smart Cards.

This announcement by Nigeria sees it following in South Africa’s footsteps as the country’s Department of Home Affairs has announced that it intends starting to issue smart ID cards to citizens starting in July, 2013 at a rate of 3 million smart ID cards a year.

It is hoped in both cases that the smart ID cards will help curb the prevalent fabrication of false identity documents in both Nigeria and South Africa as they will be embedded with microchips and with the South African smart ID cards being reported to incorporate biometric features that will also prevent identity theft as a result of the fraudulent use of a stolen or lost smart ID card.

There is also a notable difference between the South African and Nigerian smart ID cards with the West African country’s smart ID cards coming with immediate payment capability’s courtesy of MasterCard’s prepaid payment technology. The cards are also reported to come loaded with 12 other applications.

The cashless project in Ghana from the spyghana.com

Ghana, as a developing country in West Africa has taken the initiative to introduce a system where businesses can be done without using physical cash. Bank of Ghana, the regulator of the banking industry through Ghana Interbank, Payment and Settlement Systems (GhiPPS) introduced e-zwich card, where Ghanaians will feel comfortable in using the card to transact businesses rather than physical cash.

Even though there has been several effort to educate the masses about the product, the education on this e-zwich have not go well with many Ghanaians. A lot of the citizens as of today do not even know there is something called e-zwich card. With a population more than half of it been illiterate, there must be a thorough education where all Ghanaians will understand and use the platform.

In Ghana, some of the common cards we can identify are such as Sika Card by SSB, Visa Horizon by Standard Chartered Bank (Stored Value cards), deployment of Automated Teller Machines (ATM) and ATM cards by banks eCard (CAL Bank, Ecobank) and among others.

Harmless they all seem. But centralization means that people's lives will increasingly be subject to government control. Identity cards can be easily altered, changed or subjected to manipulations upon government's whim. These will be like sci-fi movies where people's identities can be wiped out or expunged through programming: You are alive, but you don't exist says the system

This also shows why governments will attack gold, bitcoins and cash, and in their stead promote centralized systems based on national IDs complimented by facilities of digital cash payments systems and other 'flavoring' or "add on" called applications. Such systems will make confiscations and totalitarianism a cinch.

Why the Indian Government’s War on Gold will Fail

noreply@blogger.com (benson_te) — Sat, 18 May 2013 07:46:00 +0000

Prime Minister’s Economic Advisory Council (PMEAC) Chief C Rangarajan has declared that India’s love affair with must be contained. Gold imports must be substantially reduced from 1,000 tonnes a year to 700 tonnes.

The imperative to contain gold import has become urgent. The recent surge in gold demand is however creating some distortions and need to be rolled back to boost growth by reversing the trend of declining financial savings and keeping CAD* within prudent limit by contain gold demand.

*CAD-Current Account Deficit

India’s government has essentially placed the burden of the Indian economy on gold. And in doing so, they justify the reinforced holistic campaign against the precious metal.

Coincidentally, India’s stepped up war on gold comes amidst the ongoing Wall Street incited crash.

The Mineweb’s Shivom Seth wonderfully explains how the campaign against gold by India’s government is being orchestrated through various fronts.

First India’s government proposes to provide an inflation hedge alternative: government inflation indexed bonds (bold mine)

It could have posed as a model scheme to curtail gold imports. In order to stifle India’s appetite for gold, the government has introduced inflation index bonds. The first tranche amounting to around $364 million (R20 billion) is to be introduced on June 4.

Inflation Indexed Bonds (IIBs) are a new category of debt instruments to be introduced in India, where the coupon and principal amount would be linked to the rate of wholesale price inflation with a lag of four months. The authorities have said the objective of introducing such bonds is to channelise savings into productive sources of instruments from unproductive ones like gold.

Slowly but surely, there seems to be an anti-gold campaign that is at play in India. The concerted effort by the Indian government to discredit gold by imposing several curbs, and channelise consumers away from the precious metal, indicates a desperation that has not gone unnoticed by savvy investors.

“The government is making it too expensive for retailers to sell gold, especially when prices have hit new all-time lows. Retailers are forced to apply hefty mark-up given the new curbs,” said Manohar Kedia, of Kedia Jewellery House.

Government inflation indexed bonds are being forced upon the average Indians, as the Indian government’s onslaught to curb the gold trade has intensified.

India’s war on gold now covers higher taxes or tariffs and import bans and limits.

Knowing fully well that Indians cannot keep away from gold for long, the Reserve Bank of India first hauled up banks for selling gold coins, then came down hard on gold retailers and bullion houses. Now, they have turned their attention on investors, urging them to invest in debt instruments.

Further, in order to moderate the demand for gold for domestic use, the government has also restricted the import of gold on a consignment basis. A major bullion retailer in Mumbai said this would prove to be a major hurdle for exporters.

For, only those exporting gold jewellery will first have to impose on banks for each consignment, given that banks will henceforth be allowed to import gold only to meet the genuine needs of exporters of gold jewellery.

The Indian government's genuine but unstated objective have been to capture or corral people’s savings, by diverting them into the government regulated or controlled banking system, and use such savings to finance a chronically insatiable and profligate government.

India's "declining financial savings" has hardly been because of gold but because of rapacious government spending.

India’s government has more than doubled the rate of spending over the past 9 years. Such spending binge has exploded the the government’s budget deficits since 2009. (charts from tradingeconomics.com)

The intensive growth in food subsidies has been part of the such spending spree, as shown by the chart above from the Reuters. Food subsidies are expected to swell by about 40% in 2014.

The Indian government has been subsidizing many industries. Subsidies according to Wikipedia accounts for 14% of the the Indian economy in 2015 (note: not government budget).

Yet subsidies has led to huge losses: as much as 39% of subsidized kerosene has been stolen, and as I pointed out last year, politicians looted food subsidies to the tune of $14.5 billion!

Aside from food subsidies, the Indian government has joined the global bandwagon of stimulating the economy nearly a year ago or in June 2012, with various forms of fiscal spending mostly in infrastructure. Thus the spending ratios should be more today

Such lavish spending has resulted to expanding the debt.

Even as debt to GDP has been shrinking, the Indian government’s external debt has massively ballooned over the same period.

This only means that the accrued government spending has been funded by debt acquired from external sources.

Again the debt to gdp metric is hardly a reliable statistical indicator because the denominator (GDP) can be driven by a credit boom and not by real growth. This is currently the case with India. India’s domestic credit to private sector has reached the highest level ever at 50.6% in 2011. India has an ongoing bubble.

While India’s foreign reserves remain near record highs, exploding fiscal deficits and ballooning external debt has led to sustained weakness in her currency, the Indian rupee.

In short, the frantic Indian government has been passing the blame on gold on what truly has been a problem of political greed via fiscal intemperance.

Importantly, the Indian government’s attack on gold represents a duplicitous move.

While the government wants access on the private sector’s savings via the banking system (which aside from funding governments will incur various taxes and fees), the desire to reduce the public’s gold holdings by holding paper money, the rupee, means governments would also impose “the inflation tax”.

So bank depositors will be hit by low interest rate, inflation tax, various fees and will be forced to hold and finance government debt, in favor of the government (who may default).

One can’t rely on statistical inflation figures to accurately represent real conditions. Statistics are likely to be manipulated for the purposes of financial repression or government plunder of private sector resources. Thus, much of the average Indians will unlikely fall for such 'inflation indexed bonds' subterfuge.

So like anywhere else, governments have been resorting to direct and indirect confiscations with increasing frequency and intensity.

Signs of boom days eh?

More entwined reasons why India’s war on gold will fail.

Gold has both cultural and monetary essence to the average Indians.

As the Deccan Gold Mines enunciates: (bold mine)

Over centuries and millennia, gold has become an inseparable part of the Indian society and fused into the psyche of the Indian. Having passed through fire in its process of evolution it is seen as a symbol of purity, the seed of Agni, the God of fire. Perhaps this is why it is a must at every religious function in India. Gold has acted as the common medium of exchange or the store of value across different dynasties in India spanning thousands of years and countless wars. Thus wealth could be preserved inspite of wars and political turbulence. For centuries, gold has been a prime means of saving in rural India.

Next as related to the cultural-religious context, India’s history has been littered with economic crises and even currency problems

To account for a recent history here is Wikipedia

Since 1950, India ran into trade deficits that increased in magnitude in the 1960s. The Government of India had a budget deficit problem and therefore could not borrow money from abroad or from the private sector, which itself had a negative savings rate. As a result, the government issued bonds to the RBI, which increased the money supply, leading to inflation. In 1966, foreign aid, which was hitherto a key factor in preventing devaluation of the rupee was finally cut off and India was told it had to liberalise its restrictions on trade before foreign aid would again materialise. The response was the politically unpopular step of devaluation accompanied by liberalisation. The Indo-Pakistani War of 1965 led the US and other countries friendly towards Pakistan to withdraw foreign aid to India, which further necessitated devaluation. Defence spending in 1965/1966 was 24.06% of total expenditure, the highest in the period from 1965 to 1989. This, accompanied by the drought of 1965/1966, led to a severe devaluation of the rupee. Current GDP per capita grew 33% in the Sixties reaching a peak growth of 142% in the Seventies, decelerating sharply back to 41% in the Eighties and 20% in the Nineties.

Aside from the rupee chart above, the following table shows how the rupee slumped relative to the US dollar from a conversion rate of 4.79 rupee/US in 1950 to 45.83 rupee/US in 2010.

One would also notice that from a base point of zero in 1975, inflation surged to 126 in 2010. And despite the plummeting rupee, through 1975 per capita income as % of the US has gyrated from 1.5% to 2.18%. This means that whatever growth India has posted over the years has failed to keep at the rate of the growth in the US.

In short, devaluation has not solved what has been a problem of politicized economy.

This brings to fore the lessons from the great Austrian economist Ludwig von Mises

The economic backwardness of such countries as India consists precisely in the fact that their policies hinder both the accumulation of domestic capital and the investment of foreign capital. As the capital required is lacking, the Indian enterprises are prevented from employing sufficient quantities of modem equipment, are therefore producing much less per man-hour, and can only afford to pay wage rates which, compared with American wage rates, appear as shockingly low.

There is only one way that leads to an improvement of the standard of living for the wage-earning masses — the increase in the amount of capital invested. All other methods, however popular they may be, are not only futile, but are actually detrimental to the well-being of those they allegedly want to benefit.

What India requires is not to regulate or prohibit gold but to further liberalize or depoliticize the economy.

Unfortunately politics is about smoke and mirrors rather than the upliftment of the general welfare

Another huge reason such campaign will fail is due to the informal economy.

The informal economy means low banking penetration levels.

From DNB.com.in

With regard to financial access and penetration, India ranks low when compared with the OECD countries. India offered 6.33 branches per 100,000 persons whereas OECD countries provided for 23-45 branches per 100,000 people in 2009. For India, the number of branches and ATMs per 100,000 persons has increased to 7.13 and 5.07 in 2010.

In India, the penetration of banking services is very low. Merely, 57% of population has access to a bank account (savings) and 13% of population has debit cards and 2% has credit cards. This represents the unmet demand and the scope for expansion for the banks in India.

And prohibition of gold and offering inflation indexed bonds as alternative will hardly improve on banking penetration levels hobbled by overregulation.

And because of intensive politicization of the Indian economy, a significant segment of India’s growth has been in the informal economy

From Businessworld/Bloomberg: (bold mine)

The size of India’s “informal” economy, meanwhile, handicaps efforts to track the number of Indians who are gainfully employed. Four out of five urban workers—who collectively produce an estimated three-quarters of the country’s output—are informally employed. That means their work does not show up in official figures on productivity, innovation, social mobility and other standard metrics of progress. It’s possible to debunk some of the myths about India’s work force—three-quarters of self-employed workers in urban areas, for example, are in single-person businesses or family enterprises without hired labor, rather than upwardly mobile entrepreneurs—but a clear picture of exactly how many Indians are working, and where, remains elusive.

The informal economy, hence, represents political or government failure from which India's government has taken gold as the 'fall guy'.

Finally, gold fits to a tee the informal economy

From the Economist (bold mine)

Pune’s wide boys aside, the traditional gold consumers are southern peasants buying jewellery. They have no access to formal finance; gold requires no paperwork, incurs no tax and is liquid. But over the past decade the mania has spread. By weight consumption has doubled, for several reasons: a surge in money earned on the black market; investors chasing the gold price; and the dismal returns savers get from deposit accounts. Real interest rates are low, reflecting high inflation and a repressed financial system that is geared to helping the state finance itself.

Another significant factor why the war on gold will fail is political insanity: doing things over and over again and expecting different results.

Attacking gold as part of financial repression measures has previously failed, it shouldn't be different this time

From the same Economist article:

India has tried coercion. Between 1947 and 1966 it banned gold imports. After that it used a licensing system. Neither worked. Smuggling soared and policymakers were reduced to tinkering with airport-baggage allowances. By 1997 trade was liberalised.

All these political pretenses which are really intended as confiscations of private savings whether through gold, cash transactions, bank deposits or bitcoins (cryptocurrencies) will eventually be exposed for the fraud they are.

India's war on gold will only intensify the growth of smuggling and the informal economy.

India's war on gold signifies also an expression of growing desperation by the Indian political class over their hold on power whose economy has partly been buoyed by credit bubbles.

India's war on gold could likewise be a part of the grand design of the cabal of political institutions or the banking system, central banks and welfare warfare states led by Wall Street in working to preserve the current unsustainable system by spreading disinformation and by the manipulation of the markets in order to dissuade the public on currency alternative options as gold or bitcoins.

US Federal Reserve’s James Bullard: Why Unemployment Targets Won’t Work

noreply@blogger.com (benson_te) — Sat, 18 May 2013 01:33:00 +0000

For the mainstream, macro-policies such as inflationism has been immensely expected to solve “micro” problems. The popular wisdom specifically fixates on the “money illusion” or “price illusion” effects of inflationism, where experts see people as having the tendency to think of currency in nominal, rather than real, terms (wikipedia).

In short, so-called experts think that people hardly think at all. Everyone of us, except them, are boneheads.

The premise where people can hardly feel, notice and respond to the changes in the purchasing power of their nominal currency serves as justification for governments to manipulate money supply intended to DECEIVE people into attaining so-called economic objectives, like lowering real value of wages. (So much for so-called "virtuous" and "transparent" governments)

Well it does seem that even some officials of the US Federal Reserve recognize the folly of such premise.

Austrian economist Joseph Salerno at the Mises Blog refers to the dissent by US Fed President of St. Louis James Bullard on unemployment targets: (bold mine)

The Fed has committed itself to maintaining its zero interest rate policy as well as quantitative easing for as long as the unemployment rate remains above 6.5 percent (and inflation rate below 2.5 percent). James Bullard, the President of the Federal Reserve Bank of St. Louis, heroically dissents from this policy of unemployment targeting, which is basically a reversion to the crude and discredited Old Keynesian doctrine. In a speech last month entitled “Some Unpleasant Implications for Unemployment Targeters”, Bullard, himself a New Keynesian inflation targeter, stated:

Attempts to address the various labor market inefficiencies solely with monetary policy do not work very well because improvements on one dimension are simultaneously detriments on other dimensions. . . . monetary policy alone cannot effectively address multiple labor market inefficiencies, and so one must turn to more direct labor market policies to address those problems.

Unfortunately, President Bullard did not articulate those “more direct labor market policies,” but they would include: the repeal of minimum-wage legislation, which destroys jobs for the unskilled; the repeal of the National Labor Relations Act, which coerces employers into collective bargaining and privileges union “insiders” against non-union “outsiders” causing unemployment or lower wage rates among the latter; and the phasing out of unemployment “insurance,” which encourages unemployed workers to spend an excessive amount of time in “searching” for jobs.

In short, mainstream’s oversimplification of micro conditions as merely driven by a SINGLE variable (price levels) signifies as arrant myopia.

There are many more or equally important factors, such as the state of property rights and other political hurdles (regulatory environment, taxes, mandates, unionism and etc..) that influence people’s incentives to conduct commercial activities.

Moreover, price level manipulation theories hardly ever consider the invisible (opportunity costs) and the secondary effects of such policies: particularly price instability (boom bust cycles, stagflation, hyperinflation) and economic discoordination.

The reality is that so-called economic objectives have been used as front or as excuse for the real design: transfer of wealth from society to the political class and the politically connected groups.

Ironically, the gist of the wisdom of economic talking heads which mainly belittles on people’s capacity to think, is founded on self-deception (from highly flawed model based assumption) and on the pandering to the political class.

Yet many fall prey to the political contrivance, "lies told often enough becomes the truth"

Heroes of Capitalism: The Humble Shipping Container

noreply@blogger.com (benson_te) — Fri, 17 May 2013 07:02:00 +0000

Many people hardly appreciate on the role played by the advances in technology in shaping social progress. Think the discovery of fire which initially allowed humans to cook, obtain warmth and protection. Fire eventually became important part of production.

Other milestone innovative technologies such as the Gutenberg printing press, the steam engine and today’s internet has dramatically transformed people’s lifestyle.

For the majority, technology advances “just happens”, they hardly have an inkling of how these things take place.

There is one significantly underappreciated hero of global trade: the shipping container

The Economist explains: (hat tip Prof Mark Perry)

THE humble shipping container is a powerful antidote to economic pessimism and fears of slowing innovation. Although only a simple metal box, it has transformed global trade. In fact, new research suggests that the container has been more of a driver of globalisation than all trade agreements in the past 50 years taken together.

Containerisation is a testament to the power of process innovation. In the 1950s the world’s ports still did business much as they had for centuries. When ships moored, hordes of longshoremen unloaded “break bulk” cargo crammed into the hold. They then squeezed outbound cargo in as efficiently as possible in a game of maritime Tetris. The process was expensive and slow; most ships spent much more time tied up than plying the seas. And theft was rampant: a dock worker was said to earn “$20 a day and all the Scotch you could carry home.”

Containerisation changed everything. It was the brainchild of Malcom McLean, an American trucking magnate. He reckoned that big savings could be had by packing goods in uniform containers that could easily be moved between lorry and ship. When he tallied the costs from the inaugural journey of his first prototype container ship in 1956, he found that they came in at just $0.16 per tonne to load—compared with $5.83 per tonne for loose cargo on a standard ship. Containerisation quickly conquered the world: between 1966 and 1983 the share of countries with container ports rose from about 1% to nearly 90%, coinciding with a take-off in global trade (see chart).

The container’s transformative power seems obvious, but it is “impossible to quantify”, in the words of Marc Levinson, author of a history of “the box” (and a former journalist at The Economist). Indeed, containerisation could merely have been a response to tumbling tariffs. It coincided with radical reductions in global trade barriers, the result of European integration and the work of the General Agreement on Tariffs and Trade (GATT), the predecessor of the World Trade Organisation (WTO).

Read the rest here.

It is unfortunate that media and politics has successfully implanted on the public of the false importance of the short term or temporary visible gains of specific personalities or groups, such that "heroes" are characterized by victors of zero-sum activities, particularly in sports, the celebrity gossip culture and in politics.

Yet the real heroes are those inventions or ideas that ingloriously radicalized improvements on the way we live over the long run.

BIS Official: Loose Central Bank Policies Looking Increasingly Dangerous

noreply@blogger.com (benson_te) — Fri, 17 May 2013 04:29:00 +0000

The chief of the central bank of global central banks, the Bank of International Settlements, has warned of unintended consequences of prolonged easy money policies

From the Wall Street Journal Real Times Economics Blog: (bold mine)

The latest to take up the refrain is Jaime Caruana, general manager of the Bank for International Settlements, who warned in an unusually frank speech in London that, while the ultra-low interest rates and ultra-easy monetary policy adopted by advanced economy central banks might have been the right response to the crisis when it broke, they are looking increasingly dangerous the longer they last.

“A vicious circle can develop, with a widening gap between what central banks are expected to deliver and what they actually can deliver,” Mr. Caruana said. “This may ultimately undermine their credibility and, with it, their legitimacy and effectiveness.”

Low rates may have helped keep banks alive and keep a roof over the heads of overextended borrowers—but they are threatening the ability of insurance and pension funds to meet their commitments, and tempting them into all kinds of wrong investment decisions in the meantime. Although he didn’t spell it out, he painted a picture of a massive and stealthy transfer of wealth from savers to borrowers.

Perhaps Mr. Caruana may have noticed of the growing disparity between asset markets and the real economy and how such policies have been failing to generate the much anticipated results.

Importantly, Mr. Caruana notes of the ethical inequities from the “massive and stealthy transfer of wealth” which in reality is taken from society (those not politically connected) and transferred to the political class and politically privileged banksters and other cronies.

The article suggest the BIS’s view should be heeded because “the BIS is one of the few international financial institutions (some say the only one) to see the financial crisis coming and to issue clear warnings ahead of time.”

This represents that cognitive bias called anchoring. In reality, past performance does not assure of future outcomes. Correct prediction by the BIS in the recent past doesn’t necessarily hold that they will be as accurate in the future.

What makes the BIS council worthwhile is the economic and the epistemological reasoning behind the analysis of current du jour easy money policies.

For instance, Mr. Caruana implicitly points to the moral hazard as consequence from such policies, noting that instead of real reforms, politicians have used central bankers as instruments to maintain the status quo.

From the same article:

Like many central bankers, Mr. Caruana put a good deal of the blame for the current mess on governments for failing to address the root causes of unemployment and low growth. “After five years of buying time, one has to ask whether that time has been – or will be – used wisely,” he said.

Likewise he warns of the anchoring bias applied to looking at inflation risks…

But he reserved a decent measure of criticism for central banks too, warning that they can’t just shut their eyes to the risks they are creating just because a certain measure of domestic consumer inflation is within its official target range.

…and of bubble cycles:

“If you don’t get financial stability, you will not be able to get price stability,” he said in follow-up comments to his speech, making clear that he understood financial stability as something to be defined globally, not just in a single country or region. That’s a problem because no central bank in the world is mandated to give a hoot about what effects its policy causes outside its jurisdiction. With an eye on the huge cross-border capital flows triggered by radical central bank action, he warned his audience how easy it is, in a globalized world, for distortions created in one country to spill over into other countries before returning “like a boomerang” to haunt the originating country.

So very apropos.

Seems like Mr. Carauana, a telcom engineer by education, has revealed tinges of influence from Austrian economics.

The BIS has been no stranger to the Austrian school. Canadian economist, William R. White, former manager in the monetary and economic department has been reputed as one of the Austrian s chool influenced economist in the BIS. In fact, it was Mr. White's paper in 2006, during his tenure, that accurately predicted the crisis of 2007-2008, from which the reputation of the above article rests on.

The US Housing Bubbles Deepens

noreply@blogger.com (benson_te) — Fri, 17 May 2013 02:50:00 +0000

Bubbles are being blown everywhere. The bubble in the US housing markets, which I have been pointing out, seems to be spreading and or intensifying.

The Bloomberg reports: (bold mine)

Just a year since the U.S. housing market hit bottom after the biggest plunge in eight decades, signs of excess are re-emerging.

An open house for a five-bedroom brownstone in Brooklyn, New York, priced at $949,000 drew 300 visitors and brought in 50 offers. Three thousand miles away in Menlo Park, California, a one-story home listed for $2 million got six offers last month, including four from builders planning to tear it down to construct a bigger house. In south Florida, ground zero for the last building boom and bust, 3,300 new condominium units are under way, the most since 2007.

The U.S. spring homebuying season has been marked by a frenzy of demand fueled by the Federal Reserve’s drive to push down borrowing costs, a scarcity of listings and Wall Street’s new appetite for foreclosed homes. While values remain well below their peak, economists including Stan Humphries of Zillow Inc. (Z) and Mark Vitner of Wells Fargo & Co. assert prices in some areas are rising at an unsustainable pace -- a dramatic shift from early 2012, when billionaire Warren Buffetts aid housing “remains in a depression.”

Why signs of bubbles? (bold mine)

U.S. home prices jumped almost 11 percent in March from a year earlier, the biggest gain since the height of the real estate boom in 2006, CoreLogic Inc. reported last week. Values are rising faster than incomes, an indication that prices may fall in some cities once higher mortgage rates erode affordability, Humphries said. Investor purchases will inevitably cool, adding another potential hit to the market, according to Vitner.

The gains in some U.S. areas aren’t sustainable for a healthy market, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

“If prices keep going up at this rate for another six months, we will have a bubble, and people will get hurt,” he said in a telephone interview.

U.S. buyers spent three times their annual incomes on homes at the end of last year, and those properties were 15 percent pricier relative to incomes than before the housing bubble of the mid-2000s, according to data from Seattle-based Zillow (Z). Markets such as Silicon Valley, Southern California, Boston and New York will look expensive relative to incomes when mortgage rates rise, Humphries said.

People buying more than their income means acquisition through debt financing or increasing exposure on leveraging.

This shows that extended price gains of any assets can only be fueled by credit expansion.

Euphoric or manic (frenzy) actions signify a reflexive feedback loop between expectations shaped from (rising) prices and outcome as a consequence of (buying) action. Such is the yield chasing phenomenon financed by debt.

As one would note, US stocks and real estate, which are titles to capital goods, have been booming even when statistical economic growth continues to wobble. The annual growth rate of the US economy has hardly topped the 2000 and 2004 highs.

So like elsewhere we are seeing “parallel universes” or price-reality distortions which are symptoms of bubbles.

Pimco’s chief Bill Gross mostly shares my view of a global pandemic of bubbles—as quoted by Zero Hedge (bold original)

We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions. It doesn't mean something like 2008 but the potential end of the bull markets everywhere. Not just in the bond market but in the stock market as well and a developing one in the house market as well.

The only difference is that Mr. Gross seems to downplay or soften on the repercussions, perhaps out of political correctness.

Yet if every action has an equal and opposite reaction then for every boom is a corresponding bust. Ramifications will certainly not be pleasant.

If central banks continue to inflate amidst a bursting the bubble, then the bust morphs into an inflation/currency crisis.

Quote of the Day: Hyperinflation Starts with a Rise in Asset Prices

noreply@blogger.com (benson_te) — Fri, 17 May 2013 01:23:00 +0000

It’s important to point out amid all this euphoria, though, that nearly every known instance of hyperinflation started with a rise in asset prices. And in this case, frighteningly enough, we’re seeing a rise in almost ALL asset prices.

This was famously the case in post-Revolutionary France in the1790s. People actually cheered the idea of creating more fiat money because the values of their properties and assets kept rising.

Eventually, so did everything else. Between 1790 and 1795, the price of flour increased more than 100-fold, from 2 francs to 225 francs. Or a pair of shoes from 5 francs to 200.

And all the while, politicians pushed to print even more, threatening that if they didn’t, the country would plunge into deflation! Sounds familiar?

Bankrupt governments almost invariably resort to the same desperate tactics– like polluting the currency into hyperinflation, selling it to the people as ‘for their own good’, and criminalizing any alternative (like we just saw today with Bitcoin).

Some of the most dangerous words on earth are “this time is different.” It’s not. This time is never different.

This is from the eloquent Simon Black at the Sovereign Man.

Be reminded that inflationism is a political process whose effects on the marketplace undergoes different stages over different time periods.

Gold as a foreign policy tool: US Government Bans Gold Sales to Iran

noreply@blogger.com (benson_te) — Fri, 17 May 2013 01:08:00 +0000

The US government overtly intervenes in the gold markets when it uses gold as a foreign policy tool.

From the Economic Times:

WASHINGTON: The United States is working to block sales of gold to Iranians in order to undermine their currency the rial and to step up pressure on Tehran over its nuclear program, officials said on Wednesday.

From July 1, the US will ban sales of gold by anyone to either the Iranian government or to Iranian citizens, a senior US Treasury official said. Washington has warned Iran's neighbors Turkey and the United Arab Emirates, key regional centers of the gold trade, to stop gold sales to Iran, said David Cohen, treasury under-secretary for terrorism and financial intelligence.

Embargoes and trade sanctions are acts of war. The US has been provoking Iran into a war ever since.

Yet the US government’s arbitrary ban gold sales are really an attack on the average Iranians whom has gravitated to gold and to bitcoins due to Iran’s simmering hyperinflation.

This shows how ruthless governments are, in wanting to starve or sacrifice innocent civilians in order to serve the political (neocons) and economic (military industrial complex) interests of the powerful elites.

And I don’t think gold has just been a foreign policy tool but a monetary signaling channel or central bank communications tool as well.

“Wall Street versus the world” attempts to impress upon the main street and the real economy that gold has lost its luster as inflation hedge. The Iranian ban seem to also suggest of the same. The same article quotes the above US official: (bold mine)

The move to block gold sales is part of the effort to further weaken the rial, he explained. "There's a tremendous demand for gold among private Iranian citizens, which in some respects is an indication of the success of our sanctions."

"They are dumping their rials to buy gold as a way to try to preserve their wealth. That is I think an indication that they recognize that the value of their currency is declining."

So from the political authority’s perspective, the ban on gold means that Iranians would have to revert to the rapidly diminishing value of the rial and die alongside with the decaying currency.

Nonetheless the average Iranians know better thus the “dumping their rials to buy gold as a way to try to preserve their wealth”.

Gold, not an inflation hedge? Only in Wall Street.

Like all forms of prohibitions they are most likely to fail.

Venezuela’s Hyperinflation: Toilet Paper Shortages

noreply@blogger.com (benson_te) — Fri, 17 May 2013 00:25:00 +0000

Inflationism destroys economic calculation and the division of labor. Such has been most evident in nations experiencing extreme form of inflation, particularly hyperinflation such as Venezuela

From the US Today:(hat tip EPJ)

CARACAS, Venezuela (AP) — First milk, butter, coffee and cornmeal ran short. Now Venezuela is running out of the most basic of necessities — toilet paper.

Blaming political opponents for the shortfall, as it does for other shortages, the embattled socialist government says it will import 50 million rolls to boost supplies.

That was little comfort to consumers struggling to find toilet paper on Wednesday.

"This is the last straw," said Manuel Fagundes, a shopper hunting for tissue in downtown Caracas. "I'm 71 years old and this is the first time I've seen this."

Yet inflationism has never been an isolated policy. Inflationism has always been part of a general policy of social repression. Thus, price controls have signfied as inflationism’s alter ego.

How Paper Wall Street Gold Dominates the Gold Markets

noreply@blogger.com (benson_te) — Thu, 16 May 2013 09:20:00 +0000

Now we have a better picture of the ongoing selloffs in gold.

We have been told that overall demand of gold slumped during the first quarter to a nine year low, primarily due to Paper Exchange Traded Products (ETP) gold.

From Bloomberg: (all bold mine)

Gold demand dropped 13 percent to the lowest in nine years in the first quarter as record exchange-traded product sales by investors outweighed a surge in buying from China and India, the World Gold Council said.

Yet most of the selling in Paper gold has been US based. Same article...

Prices that rallied as much as sevenfold in the past 12 years entered a bear market last month as inflation failed to accelerate and as equities climbed on mounting optimism that the U.S. will lead a global economic recovery. Some investors’ loss of faith in gold as a protection of wealth is being reflected in ETP holdings that have declined every month this year. About 75 percent of the ETP sales were from U.S. products, the council estimates. The price slump boosted demand for coins and jewelry….

Investors sold a record 182.1 tons of gold through ETPs in the three months through March, data compiled by Bloomberg show. Assets have since dropped another 230.1 tons, falling to 2,219.7 tons by May 14, the lowest since July 2011. Holdings are down 16 percent this year after increasing every year since the first product was listed in 2003.

The impression painted by the media is that buyers of jewelry and coins have not been due to monetary "purchasing power preservation" reasons. Only Wall Street people are qualified to be labeled as "investors".

On the other hand, falling prices have boosted demand for physical gold around the world

Global jewelry demand rose 12 percent to 551 tons in the latest quarter, as purchases jumped 19 percent to 184.8 tons in China and climbed 15 percent to 159.5 tons in India, the report showed. U.S. jewelry consumption was up 6.2 percent, the first quarterly increase since 2005, Grubb said…

Total consumer demand in China jumped 20 percent to 294.3 tons, beating Indian consumption that climbed 27 percent to 256.5 tons, the council said. Bar and coin investment advanced 22 percent to 109.5 tons in China and rose 52 percent to 97 tons in India. While the council previously said China will probably overtake India as the biggest buyer on an annual basis, it expects Indian demand may reach about 965 tons this year, remaining above Chinese consumption of about 880 tons.

“You may see a situation in the future where these two markets change places with each other on quite a regular basis,” said Grubb. “Before, it did look as if China was going to accelerate through India quite quickly and become the larger market for a sustainable period. I think that’s now much less clear. The good thing is you’ve got two big markets now.”

Global coin sales were up 19 percent from a year earlier and bar demand rose 8.1 percent. Over-the-counter and stock flow demand, partly a statistical residual, was at 119.6 tons, compared with sales of 75 tons a year earlier, the council said. That left total investment little changed at 320.4 tons.

So essentially this reveals of the escalating conflict between Paper Wall Street gold versus Physical real gold: Wall Street versus the world.

Current activities validates my perception where paper gold sales in the US are being transferred to the physical market across the globe. More from the same article:

There’s a dichotomy here between what’s happened in the ETFs, which is mainly U.S. based, and what’s happened in OTC investment, which is more outside the U.S.,” said Grubb. The OTC estimate “suggests that some investors in other geographies were buying gold and they were doing it through allocated and unallocated bullion accounts. My hunch is that a lot of that increase in demand will have been outside North America.”

It’s not just physical markets though, emerging market central banks have remained as vigorous net buyers too

Central banks added 109.2 tons to reserves in the three months through March, a ninth successive quarter of net buying, the council said. Nations from Brazil to Russia added 534.6 tons to reserves last year, 17 percent more than in 2011 and the most since 1964, it estimates. Buying may be between 450 and 550 tons this year, Grubb said.

The chart, courtesy of the World Gold Council shows of the distribution of gold demand. It also has been a revelation of the current activities in the gold markets: Wall Street versus the world

Let us summarize: the major categories of gold demand specifically jewelry, bars and coins and central banks remain net buyers, whose rate of purchasing activities have been robustly growing even as prices fall.

Net sellers have mostly been ETFs which are 75% based on the US. Technology demand which is a fraction of the overall also posted a slight decline.

Bottom line: the current selling pressures in gold has MOSTLY been a Wall Street dictated affair.

So how large are the ETFs?

According to the World Gold Council’s latest report

As of end-March, total ETF gold holdings accounted for just 1% of the entire 175,000t above-ground stock of gold. The outflow of from ETFs in the first quarter, while sizeable and significant in its impact on the overall demand figures represents an equally small proportion of the overall stock gold held by private investors.

In the latest press release, the WGC confirmed the substance of the real markets over ETFs:

Marcus Grubb, Managing Director, Investment at the World Gold Council commented:

“The price drop in April, fuelled by non-physical moves in the market, proved to be the catalyst for a surge of buying that has left many retailers short of stock and refineries introducing waiting lists for deliveries. Putting this into context, sales of bars and coins, jewellery and consumption in the technology sector still make up 81% of the market

And who are these ETP/ETF holders?

Wall Street people like George Soros, Blackrock Inc. and etc.…

If ETF products are just a smidgen of the overall markets how can they negate the influence of the much larger physical real markets?

The answer: through leveraged derivatives gold markets

Former Assistant Secretary of the US Treasury Paul Craig Roberts at the lewrockwell.com explains:

The price of bullion is not set in the physical market where individuals take delivery of bullion purchases. It is set in the paper futures market where short selling can drive down the price even if the demand for physical possession is rising. The paper gold market is also the market in which people speculate and leverage their positions, place stop-loss orders, and are subject to margin calls.

When the enormous naked shorts hit the COMEX, stop-loss orders were triggered adding to the sales, and margin calls forced more sales. Investors who were not in on the manipulation lost a lot of money.

The sales of GLD shares are accumulated by the banksters in 100,000 lots and presented to GLD for redemption in gold acquired at the driven down price.

The short sale is leveraged by the stop-loss triggers and margin calls, and results in a profit for the banksters who placed the short sell order. The banksters then profit again as they sell the released gold into the physical market, especially in Asia, where demand has been stimulated by the sharp drop in bullion price and by the loss of confidence in fiat currency. Asian prices are usually at a higher premium above the spot prices in New York-London.

Some readers have said “don’t bet against the Federal Reserve; the manipulation can go on forever.” But can it? As the ETFs such as GLD are drained of gold, their ability to cover any of their obligations to investors diminishes. In my opinion, these ETFs are like a fractional reserve banking system. The claims on gold exceed the amount of gold in the trusts. When the ETFs are looted of their gold by the banksters, the gold price will explode, as the claims on gold will greatly exceed the supply.

Kranzler reports that the current June futures contracts are 12.5 times the amount of deliverable gold. If more than 8 percent of these trades were to demand delivery, COMEX would default. That such a situation is possible indicates the total failure of federal financial regulation.

12.5 times leveraged!! No wonder Wall Street can dictate on such terms.

Unfortunately, Wall Street cannot print gold. Physical gold buyers will demand possession.

Thus the ongoing fire sale in gold which also means shifting ownership from Wall Street to the world, would eventually translate to less leverage for the former to manipulate on the gold markets

For now, Wall Street hope and prays that given their huge leverage, claims on Paper gold will not be transformed into demand deliveries.

The Real Story behind Japan’s 3.5% Statistical Growth

noreply@blogger.com (benson_te) — Thu, 16 May 2013 03:50:00 +0000

Reading media can be toxic to one’s intelligence.

Mainstream media applauds Japan’s statistical growth from “Abenomics”.

First, the statistics from he Bloomberg:

Japan’s economy expanded more than analysts estimated in the first quarter on gains in consumer spending and exports, building momentum for Prime Minister Shinzo Abe’s campaign for a sustained growth revival.

Gross domestic product rose an annualized 3.5 percent, the most in a year, a Cabinet Office report showed in today in Tokyo. The median estimate of 36 economists in a Bloomberg News survey was for a 2.7 percent gain. In the fourth quarter, growth was a revised 1 percent. GDP rose 0.9 percent on quarter.

Then the flawed interpretation:

Japan’s surging stock market is making consumers feel wealthier, helping to fuel spending and growth in the world’s third-biggest economy. Now, Abe needs to convince businesses to invest and boost wages to pull the nation out of a decade-long deflationary funk, a challenge highlighted by a decline in company spending in the first quarter.

Surging stock markets in Japan can HARDLY make the consumers feel wealthier because only 6.8% of Japanese households own stocks according to the Bank of Japan as of December 2012.

Granted let us say that these may have grown, perhaps even doubled today. But how will the 15% of households logically be sufficient to make the entire economy grow? What about the 85%? Multiplier, where?

Now the self contradiction:

Consumers are spending while businesses have been reluctant to invest, “Abe needs to convince businesses to invest and boost wages”.

Great. Spending grows the economy. But businesses are not investing. Where are people getting the goods to spend on?

Obviously from imports. Japan’s trade balance has been in a deficit. (tradingeconomics.com)

What the Japanese has been doing is simply running down on their savings or drawing from their external assets and or accumulating debt to finance such spending.

How does spending without producing extrapolate to growth? If there are no businesses where will income be generated from? Who provides the money to spend?

Another article reinforces the supply side problem where today’s falling stocks signifies a shortfall in earnings expectations.

From the Bloomberg:

Most Asian stocks fell as Japanese banks declined after forecasting lower earnings, offsetting a report that Japan’s economy expanded faster than analysts estimated in the first quarter.

Media doesn’t tell us that devaluing money would prompt for lesser demand to hold cash by spending, by buying hard assets or by sending them abroad. Just ask the citizens of Argentina.

Media also doesn’t say that price distortions reduces the incentives for investors to invest because price instability impedes on economic calculation. If Abenomics intends to produce 2% inflation, what happens if inflation goes beyond it? McDonald's increased prices by about 25%, demand slumped. Rising petrol prices reduced fisherman's cost-benefit incentives to catch squid, thus a big shortage on squid . So how will uncertainties from unstable prices driven by policies motivate investments?

I earlier pointed to the financial losses incurred by Japan's McDonald’s even with the recent hefty hikes in prices of their products. Japan’s major multinational company Sharp Corporation similarly posted the biggest losses over the past 100 years!

Japan’s 3.5% statistical growth is a function of higher prices and not because more output. Printing money increases prices but not necessarily quantitative output. Real growth comes with output not from prices.

Besides as also previously pointed out living tax increases will frontload spending and thereby boosts spending over the interim.

What would really matter is the interest rate trends, particularly the 2-5 year JGBs. That’s because a continuous surge in yields would increase rollover and credit or default risks where 2-5 year maturing JGBs account for 76% and 60% in 2013 and 2014 respectively.

There has been a material increase in such yields over the month according to the table from Bloomberg

As said before, Abenomics operates in an incorrigible self-contradiction: Abenomics has been designed to produce substantial price inflation but expects interest rates at permanently zero bound. Such two variables are like polar opposites. Thus expectations for their harmonious combination are founded on whims rather from economic reality.

And this why whatever stock market boom we are seeing will eventually metastasize into a crisis that will shake the world, if these policies will be sustained.

As for media’s misrepresentation, Nassim Nicolas Taleb recently posted at Facebook this apt description:

Journalists cannot grasp that what is interesting is not necessarily important; most cannot even grasp that what is sensational is not necessarily interesting.

War on Bitcoin: US Government Seizes Assets of Mt Gox

noreply@blogger.com (benson_te) — Thu, 16 May 2013 00:53:00 +0000

The US government has officially launched a campaign against bitcoin by seizing accounts tied to one of the largest bitcoin exchange.

From the Wall Street Journal:

WASHINGTON—U.S. officials dealt a blow to the fledgling digital currency called bitcoin, freezing an account that is tied to the largest bitcoin exchange just months after regulators warned that such entities should follow traditional rules on money laundering.

The authorities obtained a warrant Tuesday to seize an account of a subsidiary of Mt. Gox held at the online payments firm Dwolla, according to a copy of the warrant provided by the Department of Homeland Security on Wednesday. The department declined to comment further on the matter.

The scrutiny from law enforcement comes after the Treasury Department ruled in March that the same money-laundering rules that apply to traditional money-order providers, such as Western Union Co., WU +0.98% would also be applied to firms that issue or exchange online cash, including currencies not backed by a central bank.

Bitcoins are supposedly decentralized. So technically speaking the US government cannot directly strike at bitcoin without taking on the internet itself. Thus the US government’s campaign against bitcoin has been channeled through the financing facilities of the trading platforms and not bitcoin itself.

But so far, other exchanges as US-based competitors Seattle-based CoinLab and San Francisco-based Coinbase or bitcoin exchanges registered with the Treasury Department has not been subjected to the same harassment. On the other hand, the Mt. Gox case should benefit them.

The US government wants bitcoin dealers to operate under their umbrella and has assailed or harassed those operating outside their ambit.

In short, the governments will work on controlling cryptocurrencies covering all variants; aside from Bitcoin: Litecoin, PPcoin, Freicoin, Solidcoin, BBQcoin, Fairbrix, Geistgeld among the many more.

Besides, it may come as a coincidence but the Mt. Gox crackdown comes in the light of the second wave of selling pressure on gold prices. Gold fell 2.34% last night to close below the psychological $1,400 threshold level.

Remember that the Wall Street initiated flash crash in gold came alongside the crash in bitcoin prices during mid April. (chart from stockcharts.com and bitcoincharts.com)

The current actions against Mt.Gox’s bitcoin platform has so far unaffected prices of bitcoins.

The crux is--bitcoins and gold appear to be simultaneously under political pressure as expressed through prices or through direct government intervention

Yet look at the irony with the following headline: US Stocks Rise on Stimulus bets as Manufacturing Falls.

This means more bad news is good news; which also implies that stocks have been totally dependent on steroids, thus the parallel universe: stagnant economies yet surging stocks on steroids.

This also impresses on the public that the connection between gold and government steroids have become detached. People are being made to believe that gold have lost its “inflation hedge” function. (Although in the real world this hasn’t been true: Just take a look at the seminal hyperinflation phase in Argentina where the average citizens flee to gold and bitcoins as refuge)

What else am I saying? Well, governments simply hates competition. So currency alternatives as gold and bitcoins are not just being manipulated, they are being attacked.

All financial markets are being manipulated, but at different degrees. Assets that benefits the political objectives of governments such as stocks, bonds and the property sector are being subsidized (directly and indirectly) whereas those opposed such as short sellers, commodities and bitcoins are being marginalized.

But the real economy, which allegedly has been the target of all these assistance, has been ignoring them.

And yet the real objective behind all these has been to save or preserve the cartel of the political institutions of the banking system-central bank-welfare/warfare state. Remember rising asset prices buoy the balance sheets of insolvent banks and governments, thereby the cumulative inflationist policies.

Thus the parallel universe or the huge detachment between the real economy and prices of financial assets.

All these are really signs of bubble blowing activities everywhere and of how terribly desperate governments have become.

Yet all failed government actions would translate to deeper confiscations of people's savings by governments. Hence, governments are working around the clock to close all possible loopholes as seen by the attack on Mt. Gox or from the Indian government's ban on gold imports.

Video: Bill Fleckenstein on How Abenomics Could Blow Up the US and the World

noreply@blogger.com (benson_te) — Wed, 15 May 2013 10:40:00 +0000

The legendary investor and contrarian writer for MSN Money, Bill Fleckenstein interviewed by Yahoo.

A snippet of the interview transcript:

On Japan:

What is going on in Japan is potentially very, very dangerous not just for Japan but for world markets. And, I’m not speaking about the Nikkei. What has taken place in the Japanese JGB [Japanese government bond] is extraordinary. In the last three days, the yield has gone from 60 basis points to 86. Can you imagine what would happen in America if yields on 10-year Treasuries went from 6% to 8.6%?

There are huge derivative books in Japan where there’s been tremendous amount of derivatives written assuming that rates would stay low forever. I think this could be on the verge of blowing up. This may be the start of it, this may get quiet, or it may get ugly right now. That will impact the American bond market and it will affect equities everywhere. So, it’s potentially dangerous.

Read the rest at Yahoo.com

Parallel Universe: Booming German and French Stocks as Economies Stagnate

noreply@blogger.com (benson_te) — Wed, 15 May 2013 09:55:00 +0000

In a the world where central bankers have become demigods, the disconnection between the financial markets and the real economy have increasingly become evident.

From the Bloomberg:

The German economy expanded less than forecast in the first quarter and France’s slipped into recession, increasing pressure on the European Central Bank to do more to stimulate growth.

German gross domestic product rose 0.1 percent from the fourth quarter, when it fell a downwardly revised 0.7 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a 0.3 percent gain, according to the median of 41 estimates in a Bloomberg News survey. The French economy contracted 0.2 percent in the three months through March after shrinking the same amount in the final quarter of last year.

The above data revealed in the charts below. [Charts courtesy of tradingeconomics.com and stockcharts.com]

The German equity market bellwether, the DAX, has been on an uptrend (upper pane) since October 2011 even when statistical economic growth peaked during the first semester of 2010 and continues to worsen (lower pane). Thus, the two year divergence can hardly be interpreted as anomaly.

Year to date, the DAX, as of yesterday’s close, has been up 9.55% even as statistical economic growth is at the borderline with the negative.

The French phenomenon seems even more elaborate.

The French equity market as measured by its bellwether, the CAC, has been on an uptrend along with the German DAX where both began to reverse near simultaneously higher during the last quarter of 2011.

Ironically, the French economy has been zigzagging mostly in the recessionary territory (lower window) even as the stock market continues to boom through 2012 (upper window).

Once again, the French economy has been reported above as enduring a statistical recession, but the CAC has been up 10.38% year to date as of yesterday's close.

The above has been exhibiting the unintended consequences of central bank policies.

The micro or the real economy continues to suffer from real economic obstacles (high taxes, more mandates, relative price distortions, regulations and etc….) which deters investments, but adds to the incentives generated by easy money policies in diverting capital towards yield chasing activities in the financial markets, where the latter have also been buttressed by central bank guarantees.

Such parallel universe is a sign of an unsustainable bubble in progress.

For now we see a boom. Eventually we would either see a grand bursting of these bubbles that would likely lead to cascading wave of debt defaults or a currency crisis.

Argentineans Find BMWs, Bitcoin and Gold as Inflation Hedges

noreply@blogger.com (benson_te) — Wed, 15 May 2013 05:42:00 +0000

The Argentine Peso continues to massively devalue to the point that they have become symptoms of hyperinflation.

In barely a few days the peso has sunk to its weakest level ever at 10.45 pesos vis-à-vis the US dollar. As of last week, the implied annual rate of inflation, based on 9.87 pesos/USD, is at 98.7% as estimated by Cato’s Steve Hanke. In short, the peso fell by whopping 5.9% in less than a week.

Yet Argentines don’t just hold cash and see their savings erode, they have sought refuge partly through purchases of luxury cars.

From the Bloomberg:

Argentines are buying more BMWs, Jaguars and other luxury cars as a store of value as inflation decimates their deposits and pummels the nation’s bonds.

Purchases of cars from Germany’s Bayerische Motoren Werke AG (BMW) and Jaguar Land Rover Automotive Plc, owned by India’s Tata Motors Ltd. (TTMT), jumped the most in April among brands sold in Argentina. The sales were part of a 30 percent surge in car sales from a year earlier that was the biggest increase in 20 months, according to the Argentine Car Producers Association. While used-car prices rose in line with inflation last year, or about 25 percent, peso bonds tied to consumer prices fell 13 percent. The drop was the biggest in emerging markets.

Car sales in Argentina increased by the most in almost two years last month as a ban on buying dollars made Argentines turn to vehicles to protect savings against the fastest inflation in the Western Hemisphere after Venezuela. Luxury models are becoming more attractive because they are imported at the official dollar rate, said Gonzalo Dalmasso, vehicle industry analyst at Buenos Aires research company Abeceb.com. Argentines with savings in dollars are able to purchase cars at half the cost by trading in the unofficial currency market.

It is not clear how the operations of these high end car merchants remain viable considering the wide disparity between currency rates from which such trade has been conducted. The blackmarket rate is nearly about 50% below the official rate, this should translate to significant economic losses for these firms.

On the other hand, used car sellers appear to be losing money as selling prices has only been expanding at the statistical inflation rate of 25% when real inflation rate has been above 90%.

The unevenness of returns suggests of something fishy behind the surge in luxury car sales.

Though barter has reportedly been one of the options taken by these firms. From the same article:

The decree prompted BMW to export rice and Porsche Automobil Holding SE to begin exporting olives and Malbec red wine. Shizuoka Subaru Motor Co. agreed to export chicken feed, Hyundai Motor Co. began sending soy flour to Vietnam and Mitsubishi Motors Corp. (7211) started shipping peanuts.

These reports are really questionable.

Rather I suspect that these luxury car dealers are cronies or political allies, who are subsidized by Argentina’s politicians through the government. In turn, Argentina’s political elites and their allies could have been the major buyers of these high end cars.

In short, subsidies to exotic car traders are really transfers or subsidies to the political class and their cronies in disguise.

Yet the average Argentinean seeks gold and bitcoins as refuge.

Philippine Elections: The Politics of Symbolism

noreply@blogger.com (benson_te) — Wed, 15 May 2013 02:59:00 +0000

From the Inquirer:

A day after unofficial election results showed her ahead in the Senate race, Grace Poe evaded a television reporter who wanted to shadow her, received business cards handed to her staff by strangers and had Pad Thai noodles for lunch…

Nalokah (crazed),” was how Poe described herself in a solicited text message upon learning that she was No. 1 in the partial and unofficial tallies aired on television hours after voting precincts closed on Monday.

“I was very surprised, I was blown away,” she said…

Poe realized during the campaign that people wanted a closure to her father’s death. She said these people saw her “as the image of FPJ in defense of the oppressed, the champion of the poor” in his movies.

The result of the Philippine national elections demonstrates and validates theories and academic studies showing why elections are nothing but about feel good politics and of the myth of the rational voter.

The lists of winners consist of families from the political elites, celebrities or people with popular symbolical representations or a combination of.

As I wrote back then on the US elections

It would be conceivably naïve to rely on political rhetoric of competing candidates as basis for examining and projecting prospective policies.

Politicians usually appeal to the views the median voter to ensnare votes. In other words, politicians, who are running for office, are predisposed to say what the public wants or expects to hear.

On the obverse end, people hardly vote for policies but for symbolisms which these candidates represent. Thus aspiring politicians work hard to project themselves as symbols to reinforce people’s biases.

And this is why politicians usually end up with unfulfilled promises or have usually gone against their rhetorical assurances made during the campaign sorties.

Voters become useful only to politicians when election season arrives.

Yet the oppressor-oppressed political axis (Arnold Kling: Three Languages of Politics) which has been embedded deeply in human nature represents how domestic politics works, or how local politicians have exploited the Progressive perspective of justifying ‘social justice’ through coercive redistribution.

This serves as another reason why the Philippine boom will soon be revealed as a paper tiger. Social policies will be directed mostly towards redistribution than to real economic reforms. This means more government spending that will be financed by higher taxes, debt and inflation.

All these validates my view of the quasi-mob rule way of the selection process, which lays foundation to the local version of social democracy that has been skewed to, or even tacitly designed for the benefit of the political class and their allies.

As an old saw goes "the more things change the more they stay the same"

War on Gold: India bans Import Consignments

noreply@blogger.com (benson_te) — Tue, 14 May 2013 13:50:00 +0000

Well we don’t need a conspiracy plot to know that India’s gold trade has repeatedly been under assault from her government.

From the Reuters:

Gold buying in India, the world's biggest buyer of the metal, came to a halt on Tuesday, a day after the central bank restricted gold imports on consignment basis and jewellery sellers saw a sharp rise in festival sales.

On May 13, the Reserve Bank of India (RBI) banned gold imports through consignment, and traders awaited for more clarity from the central bank. Gold and silver imports rose 138 percent in value terms to $7.5 billion, data from the trade ministry showed, increasing pressure on the current account balance.

This has likely been in reaction to the fantastic 138% jump in gold imports last month, which has been spurred by a demand spike following gold price's flash crash fomented by Wall Street.

From the Hindu Times:

Terming the 138 per cent surge in gold imports last month as an ‘aberration’, the government on Tuesday expressed the hope that the appetite for foreign gold would subside by next month due to the high inventory costs.

Overall, the recent surge in imports has attributed to the drop in global commodity prices, including gold.

Talking to reporters, Economic Affairs Secretary Arvind Mayaram said it appears that to hedge against future rise the traders in India have imported large quantity of gold.

If it is true that 138% surge in gold imports has been an ‘aberration’, then why the need for the import ban? Obviously the Indian government wants to make sure that the proclaimed ‘aberration’ becomes a reality through social controls.

What such controls will do instead is to drive gold trades underground and push up premiums as supply shrinks.

Media appears to have already been in cahoots with the government in the implicit campaign to downplay or shoot down India’s feverish gold trade.

Taking a look at last Friday’s headlines from Reuters, it says "Gold Stuck in a Trading Range, physical demand down"

Has physical demand really been down?

More from the report: “Gold futures edged lower on Friday, but still stuck in familiar trading range, though demand from physical buyers was down compared with last week amid limited supplies ahead of a major gold buying festival.” (bold added)

Physical demand has been down because lack of supply? Gee. Lack of trade due to limited supply doesn’t necessarily mean physical demand is down. This may be so because limited supply means extremely high premiums.

While this may be a journalistic gaffe, on the other hand, it could well be a misrepresentation.

All these reveals how financially desperate governments have been tightening the noose on the public’s savings by attempting to wring out currency alternatives such as gold and bitcoin.

Desperate times calls for desperate measures.

Here’s a guess, India’s government will fail in her quest to quash the gold trade, which has not been only a cultural affinity but also a monetary-purchasing power issue.

Quote of the Day: Anger is a Convex Heuristic

noreply@blogger.com (benson_te) — Tue, 14 May 2013 04:48:00 +0000

Anger is a convex heuristic; it is not a reaction to be judged by its small mistakes, but by the total payoff, assuming you direct it at things that offend your sense of ethics. Forget the dictum that anger is madness, to be controlled, etc. If you systematically vent your anger at things that offend you deeply, you may have small regrets, but the upshot is that you will never feel corrupt, hypocritical, or unprincipled. This is the only life worth living. (ANTIFRAGILE HEURISTICS)

This is from Black Swan theorist and inconoclast Nassim Nicolas Taleb at the Facebook

IRS Investigations: Using Regulations to Persecute Political Foes

noreply@blogger.com (benson_te) — Tue, 14 May 2013 04:08:00 +0000

I recently pointed out that arbitrary regulations, like electoral liquor ban in the Philippines, can be used to harass the political opposition.

In the US, the tax agency the IRS will reportedly be investigated for allegedly employing the said maneuver.

According to John Samples at the Cato Blog

Last Friday, a spokeswoman for the Internal Revenue Service (IRS) admitted the agency had targeted various Tea Party and related groups during the 2010 election cycle. Later in the week, an Inspector General’s report will offer an initial look at the facts of this matter. At least two congressional committees also plan investigations.

Many people recall that the Nixon administration used the IRS to harass political opponents. Surely the IG’s report and subsequent investigations will show whether the IRS has gotten back into the business of protecting an incumbent administration from its critics.

It is not too soon, however, to recall the the campaign finance reform lobby has been calling for a crackdown on political groups since the Citizens United decision. One possibility would be that the IRS gave in pressure from the reform lobby and went after the Tea Party groups.

Was there an intention to chill speech? The timing provokes doubts: the targeting began in the spring of 2010 just as the mid-term campaign season started and ended after the election when the harassment no longer has any rationale. The long delays of approving tax status certainly slowed down the wave coming toward Congress in 2010. 66 House members lost their seats in that election. Do any sitting members owe their offices to the IRS?

Attaining social “equality” must mean equality before the law via the rule of law rather than from arbitrary edicts which picks winners and losers that engenders unintended consequences.

A timely reminder from the great Austrian economist F. A. Hayek once wrote, (bold mine)

It is the rule of law, in the sense of the rule of formal law, the absence of legal privileges of particular people designated by authority, which safeguards that equality before the law which is the opposite of arbitrary government.

A necessary, and only apparently paradoxical, result of this is that formal equality before the law is in conflict, and in fact incompatible, with any activity of the government deliberately aiming at material or substantive equality of different people, and that any policy aiming directly at a substantive ideal of distributive justice must lead to the destruction of the rule of law. To produce the same result for different people, it is necessary to treat them differently. It cannot be denied that the rule of law produces economic inequality - all that can be claimed for it is that this inequality is not designed to affect particular people in a particular way.

It may even be said that for the rule of law to be effective it is more important that there should be a rule applied always without exceptions than what this rule is.... It does not matter whether we all drive on the left- or on the right-hand side of the road so long as we all do the same. The important thing is that the rule enables us to predict other people’s behavior correctly, and this requires that it should apply to all cases - even if in a particular instance we feel it to be unjust.